Sunday, 6 August 2017

The “Global Laundromat” Investigation Turns its Focus onto RBS

In March, here
in Financial Regulation Matters, we
looked at the developing story of a massive investigation into the laundering
of Russian funds by a number of famous financial institutions, including HSBC,
Lloyds, Barclays and a host of other institutions. The massive scheme, which
runs into the tens of billions of dollars, was brought to the public’s
attention in March and detailed a scheme enveloping countries from all over the
world, with the obvious consequences being financial institutions coming in for
regulatory scrutiny and even (potentially) criminal sanctions, especially with
regards to the ongoing
situation in the U.S. with the Administration’s alleged connection to
Russian officials. However, in this post we shall focus on the most recent
development which looks at the role RBS played in the laundering system, with
the news coming at a very inopportune time in relation to the bank’s reporting
of a £939 million profit
for the first 6 months of 2017.

The week began well for RBS, with the bank announcing the
£939 million profit for the first 6 months of 2017, a result which led the
embattled Chief Executive – Ross McEwan – to announce that ‘the government is getting a
much better bank… the core of the bank is delivering’. However, that news
representing quite an outlier, because analysts firmly believe that the recent $5.5
billion settlement the bank reached with Federal Housing Finance Agency
(the first of two massive penalties) will see the bank post its tenth consecutive yearly
loss, whilst the bank confirmed that it has chosen Amsterdam
to be its European base post-Brexit. Yet, whilst the Department of Justice’s
(DoJ) penalty that is forthcoming is likely to have a hugely negative effect on
RBS’s position, the focus of the globalised money-laundering investigation is
perhaps the biggest concern for the bank, as the reputational capital that will
be lost could be extensive, especially when we consider that RBS does not have
much reputational capital to lose anyway.

It was reported on Friday that the Financial Conduct
Authority (FCA) had initiated its investigation into the bank’s alleged ‘processing
of hundreds of millions of pounds for a Russian money laundering scheme’.
We know about the money laundering scheme already, having looked at HSBC’s
alleged involvement, but the confirmed involvement of RBS would be
particularly damaging as it would represent the latest in a long line of
money-laundering charges aimed at the bank. Whilst it is very likely that RBS
will be found to have been involved, purely based on the sheer size of the
operation and the involvement of 732
banks in 96 countries, the history of the bank’s inability to comply with
Anti-money laundering rules (AML) is staggering. In 2002 the Financial Services
Authority (FSA) fined RBS £750,000
for failing to implement and act upon adequate ‘Know-Your-Customer’ (KYC)
rules. In 2010, the FSA again fined RBS a then-record £5.6
million for processing foreign payments that were potentially in
contravention of the HM Treasury sanctions list. In 2012, the FSA then fined
Coutts & Co. bank, owned by RBS, a record £8.75
million for precisely the same offence; more recently, the bank has also
been fined HK$7m by Hong Kong’s banking regulator for the same offences, mostly
related to the bank’s connection to the 1MDB Malaysian
political scandal. Whilst a more positive person may be of the opinion that
these stories are not connected, it is hard to conclude that the bank has
learned from its mistake and were not part of the impending Russian money
laundering scandal; the bank has too much form for breaching AML rules.

Ultimately, some of the conclusions that we have arrived at
here in Financial Regulation Matters
concerning RBS remain just as true in light of these recent developments; it is
difficult to see how RBS will make it back to private hands like its competitor
Lloyds has recently. The continuation of penalties and investigations makes
clear that the culture of the bank was rancid, and that cleaning it to ensure
the firm’s future is nothing short of a gargantuan task. Billion-dollar fines,
billion-pound settlements with investors, accusations of being part of a
massive and politically-incendiary money-laundering network all accumulate into
a negative outlook. When we combine this with the suggestion that the bank will
report its tenth consecutive yearly
loss, it is surprising that the British government is not considering drastic
action. The question for the government and the British taxpayer is how long
will RBS be allowed to continue? How long will it be acceptable for the British
taxpayer to hold on to this loss-making entity? Arguably, in a perfect world,
RBS would have already been dismantled and sold for the highest possible price
to avoid further losses for the taxpayer, but the loss of RBS from the
financial landscape, so soon after the Financial Crisis, would have dramatic
effects on the confidence of the marketplace. Ultimately, ‘too-big-to-fail’ is
in full effect every time RBS reports another one of its failures.

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